BF3201 Cheatsheet
1. CORPORATE GOVERNANCE
Objective of corp finance: maximize firm value. Narrower objective of maximizing stockholder wealth; when stock is traded and markets are viewed to be efficient, objective is to maximize stock price.
A. Stockholder interests vs management interests
In theory: stockholders have significant control over management. Mechanisms for discipline: Annual meeting and BOD
In Practice: Most stockholders do not go to meetings since cost of going exceeds the value of their holdings; incumbernt mgmt starts off with advantage when it comes to exercise of proxies; large stockholders do not go for meetings if they dislike management
-Calper’s test for indep boards:
Are majority of directors outside directors? Is the chairman of the board independent of the company (ie not the CEO of the company)? Are the compensation and audit committees composed entirely of outsiders?
Consequences of putting managers interests over stockholders’:
-Greenmail: target buy stake of acquirer at a very high price
-Golden parachute: Provision in employment contracts; covers managers in the event of job loss in takeover
-Poison pills: Security/rights/CF triggered by eg hostile takeover
-Shark repellents: Anti-takeover amendments dissuading takeovers. Require assent of stockholders
-Overpaying on acquisitions: driven by mgmt interests
B. Stockholders’ objectives vs Bondholders’ objectives
In theory: no conflict of interest
In practice: Bondholders concerned more about safety and getting paid, stockholders most concerned about upside potentials
Eg of conflict: increasing dividends, riskier projects
C.Firm and financial markets
In theory: Financial markets are efficient (ie managers convey info honestly and in timely manners; financial markets make reasoned judgements, not myopic)
In practice: Holes in efficient markets assumption
Eg: Info suppressed or delayed by managers; sometimes misleading info releaed; investors irrational, overreact, financial markets manipulated by insiders,
Objective of corp finance: maximize firm value. Narrower objective of maximizing stockholder wealth; when stock is traded and markets are viewed to be efficient, objective is to maximize stock price.
A. Stockholder interests vs management interests
In theory: stockholders have significant control over management. Mechanisms for discipline: Annual meeting and BOD
In Practice: Most stockholders do not go to meetings since cost of going exceeds the value of their holdings; incumbernt mgmt starts off with advantage when it comes to exercise of proxies; large stockholders do not go for meetings if they dislike management
-Calper’s test for indep boards:
Are majority of directors outside directors? Is the chairman of the board independent of the company (ie not the CEO of the company)? Are the compensation and audit committees composed entirely of outsiders?
Consequences of putting managers interests over stockholders’:
-Greenmail: target buy stake of acquirer at a very high price
-Golden parachute: Provision in employment contracts; covers managers in the event of job loss in takeover
-Poison pills: Security/rights/CF triggered by eg hostile takeover
-Shark repellents: Anti-takeover amendments dissuading takeovers. Require assent of stockholders
-Overpaying on acquisitions: driven by mgmt interests
B. Stockholders’ objectives vs Bondholders’ objectives
In theory: no conflict of interest
In practice: Bondholders concerned more about safety and getting paid, stockholders most concerned about upside potentials
Eg of conflict: increasing dividends, riskier projects
C.Firm and financial markets
In theory: Financial markets are efficient (ie managers convey info honestly and in timely manners; financial markets make reasoned judgements, not myopic)
In practice: Holes in efficient markets assumption
Eg: Info suppressed or delayed by managers; sometimes misleading info releaed; investors irrational, overreact, financial markets manipulated by insiders,